An inflation number that was slightly higher than what the market expected, and you would have thought the world was coming to an end. A little historical perspective is what's in store for this week's market musings.
The 1987 movie, "Lethal Weapon" serves as this week's inspiration. This film solidified some actors as stars and rejuvenated one actor's career. Here's some trivia about the film:
This film made more than $120 million worldwide on a meager budget of $15 million. It was actually nominated for an Oscar for Best Sound. It also spawned a franchise (3 additional films, with a 4th rumored to be in production) that grossed over $950 million at the box office.
While some other actors were initially considered, casting ultimately landed on Mel Gibson and Danny Glover for the roles of Murtaugh and Riggs in the early Spring of 1986. They were flown into L.A. to read through the script, then were flown home to pack for two intensive months of physical training and preparation for the roles.
Gary Busey plays the evil Mr. Joshua and he has credited the role for reviving his movie career. Director Richard Donner picked Busey specifically for his menacing acting to be a believable foe to Mel Gibson's character. Donner even tried to keep tension between the two offset by telling both Busey and Gibson the other was the one who kept eating the last waffle on the set each day.
John Kiedis, who portrays one of the drug dealers at the Christmas Tree lot near the beginning of the movie is the real-life father of Anthony Kiedis of the Red Hot Chili Peppers. Look close and you can see the resemblance.
Murtaugh tells Riggs that Hunsacker saved his life in the la Drang Valley in 1965. Mel Gibson would later portray Col. Hal Moore in "We Were Soldiers" (2002), which was an adaptation of that same battle.
Here's what we've seen so far this week...
Historical Perspective. One of the issues with the events of this past week has been a lack of historical perspective when it comes to the economy. It's reminiscent of the theme introduced at the beginning of "Lethal Weapon," and is carried out through the franchise, that Sargent Murtaugh is "too old for this @$%#." In this case, the current group of market analysts and economists are too young to remember the days of high unemployment, high inflation, and high interest rates.
In March of 1980, the Unemployment Rate was 6.3%, the yield on the 10-year Treasury was 12.6%, and Inflation (CPI) was 14.6%. That's clearly a different economic picture than what we have today. Currently, Inflation stands at 3.5%, Unemployment is at 3.8%, and the yield on the 10-year Treasury is 4.49%. This week, the Consumer Price Index (inflation) number for March came in at +0.4%, versus +0.3% expected, and you would have thought that the world came to an end. The year-over-year reading for CPI stands at 3.5%, right at the long-term historical average. That shifted the market's view and provided the Fed room to push rate cuts out a month or two.
Just over one month ago, Fed Futures were showing a 62% probability of the Fed's first rate cut in over four years for June. After this week's inflation number, there is now only a 26% probability of a rate cut in June. There is a 50:50 chance of a rate cut in July, the market didn't like seeing an inflation print that missed expectations by 0.1%! The economic picture is still very strong and most economists should understand that when you have economic growth, some inflation will follow. However, we are no where near the levels of March, 1980, nor the levels of the immediate aftershocks of the pandemic.
In addition, there is some anecdotal evidence that some of the components of the so-called "hot" inflation print are seasonal. If the seasonal adjustments to core CPI were stripped out, inflation would have come in lower in March. In fact, as seasonal adjustments begin to wane during the calendar year, inflation typically moves lower, which would be helpful to making the case for a Fed rate cut later this year.
Markets Get A Little Crazy. As Murtaugh is learning that he is getting a new partner, he hears the rumors that Riggs is crazy. After they respond to several police calls together, Murtaugh says, "You're not trying to draw a psycho pension. You really are crazy!" That's where we are with markets right now. Investors can't decide if markets should go higher, or if they have peaked.
Markets are responding to some geopolitical tension today as alerts have been sounded regarding an imminent attack on Israel by Iran in response to Israel's April 1st airstrikes on Iran's embassy in Damascus. Whether it's the CPI report or geopolitical tensions, we get pullbacks during a calendar year regularly. The average intra-year pullback is 14% since 1980. Right now, we've seen a 2% pullback in 2024, but that's probably not the last one, given today's market action.
Meanwhile, the underlying health of the market/economy is positive. The St. Louis Fed's Financial Stress Index is at a three-year low of -0.87. As a reminder, with the exception of COVID, the stress index climbs into positive territory several months before both the 2000 and 2008 recessions.
Similarly, the Chicago Fed's Adjusted National Financial Conditions Index has continued to loosen and is at a two-year low of -0.55 and has shown similar characteristics of the Financial Stress Index by moving into positive territory prior to the 2000 and 2008 financial crises. In fact, the contributions to the ANCFI - over 100 in number - show that only 7 are tighter than average and the majority of contributors have loosened over the past week. Again, whether it's one particular economic release or a single geopolitical event, one data point does not override the whole of data points. Right now, where we sit today, the economic numbers are solid. I'll leave you with the words of two Fed speakers from earlier this week. Boston Fed President Collins stated this week, "Strong job market reduces the urgency of a rate cut need." As far as rate hike concerns, New York Fed President Williams stated, "A rate hike is not part of the baseline view for the outlook." Stay tuned, but remain calm.
That's one way to get him down...
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